Market Views: Is holding cash a safe haven or a trap?
When uncertainty persistently looms over financial markets, investors often find themselves grappling with a fundamental decision: whether to stay invested or shift their holdings to cash.
The subject has become a hot topic of discussion among investors, particularly due to the lingering impact of last year's unsettling 20% decline in both stock and bond prices, which continues to weigh heavily on people's minds.
The allure of cash can be particularly enticing amid market volatility, as it offers a sense of security of protecting capital as well as creating a well of liquidity that could be held in waiting until a clearer picture emerges.
However, this strategy is not without its drawbacks. During periods of market volatility, it is not uncommon for equities or other assets to rebound swiftly. Investors could miss out on that.
Holding cash for an extended period also exposes investors to the inflationary risk of eroding the purchasing power of that withheld capital over time.
Against this backdrop, AsianInvestor asked asset managers and industry experts whether they believe cash is king in these uncertain times.
The following responses have been edited for brevity and clarity.
Sylvia Sheng, global multi-asset strategist
JP Morgan Asset Management
JPMAM
Cash yields may appeal to some investors at the moment, but given the possibility of cuts later in 2024, we favor carry assets, especially credit, in the current environment.
Cooling inflation, combined with slower but positive growth, probably keeps rates on hold for some time and gives few clear directional signals for markets.
Such conditions favor carry trades, relative value positions, manager selection alpha and an emphasis on portfolio diversification much more than bold directional calls.
Since firms had termed out their liabilities in the aftermath of the pandemic, the transmission of volatility from policy to credit and equity markets was weakened.
Refinancing cliffs will eventually loom closer but remain manageable for much of next year. And with policy on hold, we see rate volatility declining, which creates a favorable environment for carry assets.
By and large, we play credit with an up-in-quality bias, but this is not a simple matter of investment grade over high yield.
The differing impact of higher rates by sector and by country leads to a richer opportunity set in which to express our preference to be overweight credit. Credit may also be a preferable means of adding beta to a portfolio rather than adding equities, particularly for those with an income objective.
Raf Choudhury, investment director of multi-asset solutions
abrdn
abrdn
In the current environment with greater market uncertainty and increasing geopolitical risk an allocation to cash can act as a ballast to a portfolio.
It reduces risk and overall portfolio volatility while still contributing positively given the current rates on offer.
Where we think investors should be cautious is around the level of cash that they hold.
The fastest pace of interest rate hikes since the early '80s has seen both stocks and bonds come under extreme pressure.
That’s made cash even more appealing but timing when to get in and out of any asset is notoriously difficult. The current period we are in is a good example of how holding cash might help preserve capital in the short term but generally isn't going to help build wealth over time.
We don’t think that rates are going to stay at these levels over the long term even if current policy guidance talks about “higher for longer”. Cash may or may not remain appealing at that time but for now at least we continue to maintain an allocation to cash in our tactical portfolios.
There are some opportunities we are exploring that we may in time redeploy to from cash. One is government bonds, which are looking increasingly attractive given where yields have spiked. And then there are some equity markets and sectors.
For now, we do think cash has its place in a portfolio, as part of a broader, more diversified portfolio allocation.
Mike Gitlin, president and CEO
Capital Group
Capital Group
An all-time high of $10 trillion in assets are in money market funds globally, since the macro and financial environment have driven many investors to take flight from markets and shift into cash-like investments.
With the Fed rate hike nearing an end, an investor opportunity arises.
History shows that in the 18 months after the Fed ended hikes in the last four cycles, yields on cash-like investments have traditionally decayed rapidly while equity and fixed income returns were both strong in the year that followed.
Importantly, for long-term investors, these sectors maintained relative strength over a five-year period.
Inertia can be a very powerful force, especially 5% cash yield-induced inertia.
Investor emotions are real. We get that past losses sting for a long time, and today’s seemingly attractive rates on money markets feel good.
But as investors, we know markets don’t idle for long. Investors could become stuck in cash if they wait too long to get back into the market, as better potential opportunities emerge.
We believe now is the time to make the shift out of cash. This environment still presents opportunities for long-term investors focused on fundamentals.
Wei Li, portfolio manager multi asset quant solutions
BNP Paribas Asset Management
BNPAM
Although cash currently can generate a reasonably high yield, if the market is correct that rates have peaked, and growth starts to weaken, investors may want to consider diversifying their investments.
From an asset allocation perspective, we favor emerging Asia equities and private credit.
Over the last several quarters, US earnings growth has surprised positively, but we doubt this can be sustained.
There may be pockets of strength in artificial intelligence (AI)-related sectors, which would support profits for some of the mega-cap tech companies.
Much of the rest of the market, however, has been buoyed by the ‘money illusion’, that is, in a period of high inflation, nominal profits rise as companies raise prices, but underlying volume growth is lacklustre. As inflation abates, profitability may come under strain.
In addition, good nominal GDP growth has helped contain corporate credit spreads, but issuers face a large maturity wall in 2024 and 2025 when they may have to refinance at much higher rates, eating into profits.
Our long-term valuation framework suggests US and European equities are overvalued. Relative to developed markets, emerging market stocks have been trading at a considerable discount.
Furthermore, the post-COVID-19 era has seen an unprecedented accumulation of capital across private strategies that have surpassed $13 trillion AUM.
We think private credit can navigate a 'higher for longer' rates environment well given that the direct relationship between lenders and borrowers can provide higher flexibility.
Ben Bennett, investment strategist, APAC
Legal & General Investment Management
LGIM
Whether cash is king rather depends on your outlook for the US economy in the coming months.
Potentially, there are three main scenarios: a US recession (“hard landing”); persistently higher for longer interest rates (“no landing”); or US inflation eases without a sharp increase in unemployment (“soft landing”).
My assessment is that credit and equity market total returns will be generally negative in a hard landing, so cash will outperform.
I think it’s a tie under a soft landing – credit market yields at least start at attractive levels, while equity markets might eke out a small gain.
A soft landing should see credit and equity market returns outstrip cash significantly.
My view is that a US hard landing is still more likely than not, so cash would be a sensible choice for me.
However, the downside risk for equity markets is particularly elevated in a recession scenario as analysts cut earnings expectations.
Fixed income, on the other hand, is protected by elevated government underlying bond yields. So cash might be king for now, but bond duration could be next in line to the throne.